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Why Halliburton Is the Best Oilfield Service Stock Right Now

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Following a plethora of jumps and drops, the price of crude oil rose an impressive 45% last year. This helped ‘Energy’ to be crowned as the top performing S&P sector in 2016 with a market-thumping 24% return.

By February, prices plunged all the way to a low of $26 per barrel, thanks to the boom in shale oil production and rising output from OPEC. The dramatic slide prompted several analysts to make bold calls on a potential bottom. While some suggested prices might drop as low as $20 a barrel, gloomier estimates called for a sensational $10-per-barrel floor.

But thankfully, none of these bone-chilling forecasts were correct.

A historic OPEC production cut agreement, together with help from non-OPEC producers and slashing investments (in existing and new wells) have seen oil prices more than double from their last February lows to $52.

A Better Climate for Oil Producers

While all crude-focused stocks stand to gain from rising commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they can extract more value for their products. Consequently, with oil prices recently jumping to their highest levels in 18 months, upstream firms are hoping for an untick in their their revenues, earnings and cash flows.

Good News for Oilfield Service Players

While the oil price rebound is good news for E&P stocks like Apache Corp. (APA - Free Report) , W&T Offshore Inc. (WTI - Free Report) and Sanchez Energy Corp. (SN - Free Report) , it also translates into a better market for oilfield service providers. This industry includes providers of technical products and services – from locating hydrocarbons to optimizing production through the life of the field – to companies drilling oil and gas wells.

If the producer selects the area to drill for oil and arrange finances for the operation, it’s the service providers who supply the tools, equipments and the manpower to make the exploration and then production possible.

Among such companies, Halliburton Co. (HAL - Free Report) – the only stock in the industry that sports a Zacks Rank #1 (Strong Buy) – warrants particular mention. With its massive market capitalization of $50 billion – Halliburton is one of the major players in the Oil and Gas - Field Services industry, which is ranked 91 out of the 265 industries in our coverage (top 34%). The broader ‘Oil and Energy’ sector of which it is a part, is also positively placed at number 2 out of a total 16 sectors we cover (top 13%).

Why Halliburton Is Flying High:

Profile: Houston, TX-based Halliburton is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance, and engineering and construction services to the energy, industrial, and government sectors. The company operates under two main segments: Completion and Production, and Drilling and Evaluation.

Improving Industry Fundamentals: As per weekly releases from Baker Hughes Inc. , U.S. rig count fell to record levels last year and oilfield services players (like Halliburton) were hit hard. Unprecedented declines in activity levels and a sharp fall in upstream spending led to lower revenues and pricing headwinds.

However, as commodity prices steadily improve and drilling activities pick up, the market for services companies is on the mend. Though we are still not anywhere near the activity highs seen in 2014, spending on exploration projects have experienced a much-awaited rebound. The energy explorers, buoyed by the jump in commodity prices, are set for improving sales and earnings – a part of which is likely to be pocketed by the long-struggling oilfield service providers.

Aggressive Implementation of Cost Reductions: We appreciate Halliburton’s cost-cutting initiatives (like reduced headcount, consolidating facilities) in the midst of weak oil prices over a length of time. As of the end of third quarter, the company has successfully implemented on its plan of pruning annual costs by $1 billion, which Halliburton initially expected to achieve only by the end of 2016. In fact, Halliburton has used the challenges prevailing in the industry to its advantage, mainly by offering low cost solutions that aids producers in churning out more by investing less.

Impressive Stock Performance: Halliburton’s stock performance has been pretty exciting lately. Shares are near fresh highs these days, and the stock has recovered nicely from its rough start to 2016 when oil prices fell to a 12-year low. In fact, Halliburton has run up 25% in the past 6 months thanks to a surprise third-quarter earnings, coupled with commitments by OPEC and non-OPEC players to slash production targets. The price movement compares favorably with the industry, which has advanced just 12% over the same period.

Consistently Delivering Earnings Surprises: The world's second-largest oilfield services company after Schlumberger Ltd. (SLB - Free Report) also has an incredible history when it comes to beating earnings estimates. Investors should note that Halliburton hasn’t missed earnings estimates since mid-2014.

Halliburton Co. Price and EPS Surprise

 

Halliburton Co. Price and EPS Surprise | Halliburton Co. Quote

Above-Average Long-Term EPS Growth Rate: Moreover, the company’s expected EPS growth rate for 3 to 5 years currently stands at 14.10% –– comparing favorably with the industry growth rate of just 11.30%.

In Conclusion

While Halliburton is part of a rebounding industry, it’s clear that the company has a fantastic surprise history, which means it is more predictable. It is also a strong buy because of the continued impact of its global cost savings.

Other Stocks

Apart from Halliburton, investors interested in the oilfield services space may also consider Basic Energy Services Inc. , which carries a Zacks Rank #2 (Buy). Founded in 1992, Fort Worth, TX-based Basic Energy Services is a top provider of well servicing rigs and equipments. It surpassed estimates in two of the last 3 quarters.

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